Is House Hacking in California feasible with traditional financing?

[Albert A.]

Hello,

I've been working on getting my first house hack deal in the central valley in California for almost a year now. I've looked at on-market deals daily, joined all the Facebook groups where they post "off" market deals (wholesalers, etc) and have spoken with many realtors. I think I have a decent grasp on how to calculate all the expenses and simulating potential gross income, including potential cash flow. In all potential properties, my numbers have come off at least -$500/m. They all lead to a significant negative monthly return due to one or more of the following reasons:

1) Asking Price is too high
2) Traditional loan rates (FHA and Fannie Mae) are too high and affect total debt payment
3) Existing rents are too low, so loan underwriters won't approve.

4) Market Rents aren't high enough

5) I would like to use the minimum down payment with FHA (3.5%) or Fannie Mae (5%).

So, from all of these attempts, my understanding is the only way to make a house hack work in this region where I would at least breakeven on a monthly basis, is to purchase at a significantly lower price, lock in a nice creative deal or bring up my down payment to at least 20%. I've been unsuccessful with the first two and a higher down payment is not within my range, nor do I think it's worth it.

Same issue for house hacking with a SFH.

I've spoken with several lenders. I don't know of other options that exist. Is a house hack in this region essentially impossible from a positive cashflow stand point if you go through traditional financing and purchase at market value? Is there anything I'm missing or is this just part of the game where you have to find that one deal that works?

[Erik Estrada]

It Is very difficult for an average Californian to obtain financing for the purchase of a primary residence (no house hack) due to higher rates and higher prices in the state. In most areas it is more cost effective to rent than to own (unless you want to be house poor). I could only imagine how much more difficult it will be to find a property that will allow you to house hack with positive cash flow. 

I think you may want to look into areas out of state, where rents are strong and prices are lower. 

[Bradley Buxton]

@Albert A.

One reason the house hack is so great is that you don't need to break even. Even if you are losing $500 per month which is ideally less than you'd pay in rent AND you get the other benefits of owning real estate like appreciation, value add equity, and the tax benefits.  

[Ko Kashiwagi]

Hi Albert,

Positive cash flow house hacks are very difficult to find in CA. However, if the net negative cash flow is less that the rent you are paying, it's still a win. You could also look into properties that have ADUs or do STR to increase rent.

[Rick Albert]

If the numbers broke even at 3.5%, investors would be flocking to buy that property putting 20% down.

House Hacking is about the long term gain. In real estate, you make money four different ways:

1. Cash Flow

2. Appreciation

3. Tax Benefits

4. Loan Buy Downs

House hacking helps you with all four. 

The central valley has potential (I went to college at CSU, Stanislaus). I would stick close to campus. Nice area and good tenant pool. I was analyzing a triplex over there a while back but sold before I could submit an offer. There is multifamily there that I would consider. Your main competition is the dorms and the apartments on the north side but housing in general is still sparse for college students.

[Albert A.]

Quote from @Erik Estrada:

It Is very difficult for an average Californian to obtain financing for the purchase of a primary residence (no house hack) due to higher rates and higher prices in the state. In most areas it is more cost effective to rent than to own (unless you want to be house poor). I could only imagine how much more difficult it will be to find a property that will allow you to house hack with positive cash flow. 

I think you may want to look into areas out of state, where rents are strong and prices are lower. 

 Completely agree with you. Due to the owner occupancy rules and personal matters, I'm really trying to purchase in state. I've seen a lot of nice properties out of state.

[Albert A.]

Quote from @Bradley Buxton:

@Albert A.

One reason the house hack is so great is that you don't need to break even. Even if you are losing $500 per month which is ideally less than you'd pay in rent AND you get the other benefits of owning real estate like appreciation, value add equity, and the tax benefits.  

Hey Bradley, I see what you're saying. The negative $500~ I mentioned is just a "best case" scenario on what I'd lose if I had to potentially move out down the line. I do need to do more research on the benefits of appreciation and taxes. My worry is always having the means to be able to take care of that monthly loss down the line.

[Albert A.]

Quote from @Ko Kashiwagi:

Hi Albert,

Positive cash flow house hacks are very difficult to find in CA. However, if the net negative cash flow is less that the rent you are paying, it's still a win. You could also look into properties that have ADUs or do STR to increase rent.

Hey Ko, thanks for bringing that up. I've come to terms that some negative cash flow is to be expected in my market, just trying to minimize it as much as possible by structuring the deal. ADUs are hard to come by.

[Albert A.]

Quote from @Rick Albert:

If the numbers broke even at 3.5%, investors would be flocking to buy that property putting 20% down.

House Hacking is about the long term gain. In real estate, you make money four different ways:

1. Cash Flow

2. Appreciation

3. Tax Benefits

4. Loan Buy Downs

House hacking helps you with all four. 

The central valley has potential (I went to college at CSU, Stanislaus). I would stick close to campus. Nice area and good tenant pool. I was analyzing a triplex over there a while back but sold before I could submit an offer. There is multifamily there that I would consider. Your main competition is the dorms and the apartments on the north side but housing in general is still sparse for college students.

Good point Rick. My sights were mainly on cash flow, but I do need to do more work on understanding tax benefits and appreciation. Because of how the market is today, I thought focusing on getting as close to a monthly break-even as possible would shield me from the potential drastic changes that may impact properties over the next few years - significant price changes, interest rates, etc. 

Took a quick look at that area and seems the market is similar. I'll definitely do more research and see what I can find.

[Jake Andronico]

@Albert A.

Great questions. This is just the reality of most markets with prices and interest rates where they are. 

I've house hacked twice in Reno, NV and it's changed my life. 

We're seeing breakeven at about 25-30% down in Reno, NV for some of the best properties. We analyze the entire market simultaneously and sort by cap rate. 

There are a couple of other options I can think of: 

1. Juice cash flow by renting by the room or renting out separated spaces. 

2. Be aggressive on offers with a seller credit that buys down the interest rate to a payment that makes sense. 

Keep your head up and keep analyzing properties! I hope this helps, and best of luck to you!

[Jay Orlauski]

Hey Albert - congrats for educating yourself and getting out there to do the legwork involved with finding a good deal. It sounds like you have your fundamentals down - I feel like part of your problem is that you are looking at "ON-MARKET" homes which (in California) will almost never cash flow. There are some good things mentioned here about other aspects to look at such as appreciation or tax benefits, but I totally understand wanting to cash-flow out the gate. That has always been one of my primary 'must-haves' for an investment. 

You might want to consider starting a marketing campaign or partner with someone doing a marketing campaign so you can identify properties that really are below market. A marketing campaign can help you find sellers who are in trouble and need to get rid of their house right away. It could be due to foreclosure, a death in the family, or they need to move out of state/town right away. There are several reasons that someone would liquidate a home quickly, and a targeted marketing campaign like sending out mail pieces could put you in front of those sellers. Homes on the open market are typically not in a situation where owners need to dump the property as soon as possible and so they can ask market price for the property. These are not the kind of homes that are going to cashflow for you. 

I also agree with one of the other posters that a cashflowing 3.5% down property would have investors flocking to it with their own 20% down. It's going to be a tough gig to cashflow with only 3.5% down. You may want to see if you can start putting away more money so you can have a larger down-payment. 

What you are looking to do is not impossible but it is not easy either. You may have to deal with negative cash flow while your living there ( basically pay rent)  - add improvements that add value to the property so that when you do move out, you can increase the rent. Even if you never move out to rent it - it could be a situation where you live there for a while - improve it , then sell it. 

You will still have to pay someone to live somewhere anyway so you may as well build equity at the same time and as a backup plan, sell the property if you are not going to be able to rent it out. You'll have a roof over your head, some equity, and options for the future. Best of luck to you. 

[Albert A.]

Quote from @Jake Andronico:

@Albert A.

Great questions. This is just the reality of most markets with prices and interest rates where they are. 

I've house hacked twice in Reno, NV and it's changed my life. 

We're seeing breakeven at about 25-30% down in Reno, NV for some of the best properties. We analyze the entire market simultaneously and sort by cap rate. 

There are a couple of other options I can think of: 

1. Juice cash flow by renting by the room or renting out separated spaces. 

2. Be aggressive on offers with a seller credit that buys down the interest rate to a payment that makes sense. 

Keep your head up and keep analyzing properties! I hope this helps, and best of luck to you!

Thanks Jake. Yea, seems a higher down for a on market deal is one of, if not the only, way to get into breakeven or positive cashflow year 1. 

[Jake Andronico]

Quote from @Albert A.:

Quote from @Jake Andronico:

@Albert A.

Great questions. This is just the reality of most markets with prices and interest rates where they are. 

I've house hacked twice in Reno, NV and it's changed my life. 

We're seeing breakeven at about 25-30% down in Reno, NV for some of the best properties. We analyze the entire market simultaneously and sort by cap rate. 

There are a couple of other options I can think of: 

1. Juice cash flow by renting by the room or renting out separated spaces. 

2. Be aggressive on offers with a seller credit that buys down the interest rate to a payment that makes sense. 

Keep your head up and keep analyzing properties! I hope this helps, and best of luck to you!

Thanks Jake. Yea, seems a higher down for a on market deal is one of, if not the only, way to get into breakeven or positive cashflow year 1. 

You can also try to get the maximum seller credit to buy down your rate :)

[Albert A.]

Quote from @Jay Orlauski:

Hey Albert - congrats for educating yourself and getting out there to do the legwork involved with finding a good deal. It sounds like you have your fundamentals down - I feel like part of your problem is that you are looking at "ON-MARKET" homes which (in California) will almost never cash flow. There are some good things mentioned here about other aspects to look at such as appreciation or tax benefits, but I totally understand wanting to cash-flow out the gate. That has always been one of my primary 'must-haves' for an investment. 

You might want to consider starting a marketing campaign or partner with someone doing a marketing campaign so you can identify properties that really are below market. A marketing campaign can help you find sellers who are in trouble and need to get rid of their house right away. It could be due to foreclosure, a death in the family, or they need to move out of state/town right away. There are several reasons that someone would liquidate a home quickly, and a targeted marketing campaign like sending out mail pieces could put you in front of those sellers. Homes on the open market are typically not in a situation where owners need to dump the property as soon as possible and so they can ask market price for the property. These are not the kind of homes that are going to cashflow for you. 

I also agree with one of the other posters that a cashflowing 3.5% down property would have investors flocking to it with their own 20% down. It's going to be a tough gig to cashflow with only 3.5% down. You may want to see if you can start putting away more money so you can have a larger down-payment. 

What you are looking to do is not impossible but it is not easy either. You may have to deal with negative cash flow while your living there ( basically pay rent)  - add improvements that add value to the property so that when you do move out, you can increase the rent. Even if you never move out to rent it - it could be a situation where you live there for a while - improve it , then sell it. 

You will still have to pay someone to live somewhere anyway so you may as well build equity at the same time and as a backup plan, sell the property if you are not going to be able to rent it out. You'll have a roof over your head, some equity, and options for the future. Best of luck to you. 

Hey Jay, thanks for taking the time to write all of this. Yes, the issue has been the primary focus on on-market homes and that's partially been because of the lack of success in finding off-market homes. I agree that marketing campaigns can yield the type of properties I'm looking for and will start them soon. Already working on a simple landing page for potential leads.

I've explored all of the off-market avenues I could find and I guess I haven't been able to find the right deal from wholesalers and realtors. Cold calling has been unfruitful as well, so I'll focus on digital leads for my next attempt. I'm okay with a reasonable amount of negative cash flow if the rest of the deal makes sense.

Excellent perspective on your last point. I love the benefit of having the loan buy down by other tenants for me, and with most deals this would bring my monthly net payment to about the same as if I were to rent another property myself - plus I get the equity, appreciation and potential financing opportunities in the future.

Appreciate your time!

[Isreal Adeyanju]

Hey!

When analyzing a property investment, consider the potential for appreciation and the opportunity to tap into the California market. Also, account for all the tax benefits of ownership, such as mortgage interest deductions, depreciation, and deductions associated with expenses. Finally, even if you experience negative cash flow, remember that a portion of your mortgage payment goes toward the principal, meaning you’re still investing in your equity. When interest rates drop and you refinance, you'll see a positive impact on your cash flow. I'd also recommend prioritizing municipalities that don't have short-term rental limitations as you'll see greater returns with STRs, especially in the midterm as you wait to refi.

[Greg B.]

California's high prices make it more difficult, but not impossible.  With high prices, you also get higher rents, and with low inventory, there is high demand for properties, even with some blemishes on it.

A number of factors contribute to whether it is possible for you.  

1) Location.  There are homes in California which sell for $150,000.  You may just not want to live there and the rental demand will likely not be as high.  Typically coastal communities in California are much much more expensive than inland communities.  

2) Your own budget: What can you afford, and how crowded are you comfortable living?

3) Have you considered ADU upgrades? Statewide laws signed in 2023 now allow ADUs to be built on every residential property. Single family properties can add one and multi-family properties may be able to add more. There are still restrictions on setbacks from property lines, but local zoning and HOAs can no longer stop you based on the state law. These ADUs can also include a Garage conversion. So consider the costs to convert or add space on the property after a purchase, and the income that would be added from the addition of the space.

Since the property purchase includes a high price for land already, the rentable space that you add to the property can have a net positive impact on your overall cash flow, allowing you the potential on the right property to reach a net positive cash flow, and also the potential to build a portfolio of properties over time using the strategy.

Transparency: I am Greg from BuildCali dot com, and would be happy to help you with any project you have questions about and to share some great free online resources for further research.